Market-wide illiquidity and the distribution of non-parametric stochastic discount factors

David Abad, Belén Nieto, Roberto Pascual and Gonzalo Rubio

International Review of Financial Analysis, 2023, vol. 87, issue C

Abstract: Employing out-of-sample non-parametric estimation techniques, we show that market-wide liquidity risk matters for asset pricing independently of the specific functional form of the stochastic discount factor (SDF) and, therefore, of the asset pricing model specification. Market-wide illiquidity significantly affects the distribution of the SDF. Specifically, it boosts up the volatility of the SDF, causing minor effects on higher moments of its distribution. This finding is robust to the use of different sets of test assets in the estimation of the SDF, including equity and corporate bond portfolios, and the use of a high-dimensional data estimation procedure.

Keywords: Market-wide illiquidity; Non-parametric stochastic discount factor; Volatility, skewness, and kurtosis of the model-free stochastic discount factor, market realized volatility; High dimensional data estimation (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:87:y:2023:i:c:s1057521923001667

DOI: 10.1016/j.irfa.2023.102650

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